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How the U.S. can become the most competitive manufacturing economy in the world once again

The United States was once the world’s largest exporter of manufactured goods, but the long-run competitiveness of the U.S. manufacturing sector is now at risk.

Our newfound competitiveness problem presents a puzzle. The U.S. is the world leader in scientific research, and scientific discovery—which is the basis of manufacturing innovation. Productivity growth—which depends in significant measure on technical innovation—is the basis for long-run competitive success.

So why has competition from firms in countries like Germany and China, with scientific establishments inferior to ours, not caused U.S. manufacturers to translate an absolute advantage in basic science into manufacturing innovation and rapid productivity growth?

Technological ‘valley of death’

The explanation lies in a collective-action problem. Individual profit-maximizing firms underinvest in applied proof-of-concept research, measurement technology and standards, and workforce training because they cannot capture all the benefits of those investments.

The failure to make these investments creates a “valley of death” between scientific discoveries and commercial production. Failure to translate new discoveries into workable techniques slows productivity growth. Individual firms have shown they don’t have the incentive to bridge the valley on their own, so the federal government and nonprofit sector will have to step in to correct this market failure.

Without effective efforts to address this crucial shortcoming, we set ourselves up for continuing trouble. The prospects for high-wage manufacturing employment will continue to decline, as our competitors produce lower-cost and higher-quality products.

Our manufacturers will also have a harder time meeting the requirements that climate change is already imposing on them. As climate change forces governments around the world to limit greenhouse-gas emissions, manufacturers will need to employ new technologies both to meet domestic regulatory requirements, and to avoid soon-to-be-implemented carbon border-adjustment taxes on exports with high embedded carbon content.

They also will be at a disadvantage innovating the climate-friendly products that the world will demand.

Moreover, it will be harder to limit potential harms to our population created by global supply chains of strategically important goods. As the COVID pandemic has demonstrated, extended supply chains limit our ability to respond to crises.

We know what works

There are, however, workable policies to increase the ability of scientific innovation to cross the “valley of death.” There is no reason to cede to our competitors the market of climate-friendly, strategically important products such as steel, cement, medical supplies, renewable hydrogen, or of artificial intelligence techniques.

In the late 1980s, for example, the U.S. semiconductor industry was losing ground to Japan and other competitors. There was concern that we would lose the ability to manufacture cutting-edge components for national defense and computers. The federal government stepped in to form a public-private consortium—SEMATECH, which connected 14 domestic chip manufacturers. SEMATECH is credited with helping return U.S. semiconductor manufacturing to a leadership position.

More recent German experience shows that this model can be effectively implemented across a range of manufacturers. Germany currently supports 74 Fraunhofer institutes—public-private applied research consortia, each focusing on a particular manufacturing area, such as applied optics and precision engineering. These institutes help German manufacturers, many of which are small- and medium-size firms, maintain steady productivity growth and deliver high-quality manufactured goods. German manufacturing workers also benefit. Their wages are substantially higher than those in the U.S.

The U.S. is not completely unprepared to apply the lessons of SEMATECH and the Fraunhofer institutes in systematic fashion. We can build on the SEMATECH-like Manufacturing USA program—a recently established network of 14 public-private research institutes, each focused on a particular advanced manufacturing technology—to ensure that cutting-edge manufacturing technology is developed and sited here. While Manufacturing USA is already providing value, it should be expanded.

We can also reconfigure and expand the effective but woefully underfunded Manufacturing Extension Partnership—a system of federal-nonprofit partnerships, each of which operates a center intended to help small- and medium-size manufacturers improve production processes, upgrade their technological capabilities, and innovate—to move more smaller manufacturers to the productivity frontier.

Federal role

To enable workers to adapt to new production processes, we can mandate the Labor Department to develop workforce training for firms participating in the Manufacturing Extension Partnerships and Manufacturing USA program. Creating continuing state-of-the art training, with recognized credentials, will help raise productivity, labor-market mobility, and real wages.

Also, requiring the federal government to buy manufactured goods from high-performing domestic firms, with high productivity, high wages, and good workforce training would support good jobs and encourage innovation.

The results from these policy changes will not be immediate. It can take as long as 10 years to move a scientific innovation from the university lab to the manufacturing workbench. But if we do not start now, the transmission of new ideas and techniques will be far slower.

Now is the time to begin implementing these policy changes. Congress will soon begin to consider legislation to implement the president’s Build Back Better initiative. A desire for higher working-class wages and employment, and a recognition that we must respond forcefully to climate change, motivate that plan. Pursuing policies that will raise manufacturing competitiveness, support high-performing firms, and develop low greenhouse-gas production techniques will surely help in reaching those goals.

Keeping U.S. manufacturing competitive is essential. Unless we adopt better strategies to help our manufacturers bridge the “valley of death,” the prospects for high-wage manufacturing employment, and for success in meeting the demands posed by climate change, and a secure supply chain will be greatly diminished.
Source: Market Watch

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